Oil Holds Above $98 After Inventory Report

Oil futures were higher on Thursday, after a government report showed U.S. crude oil inventories fell last week.

U.S. crude oil inventories fell by 889,000 barrels, according to a report from the U.S. Energy Information Administration.

Brent crude was last $4.08 higher at about $117.70 a barrel, after reaching highs of $116.85 a barrel.

U.S. light, sweet crude last rose $1.77 to trade at about $98.42 a barrel by the same time, having touched highs of $99.05 a barrel.

Oil was also earlier lifted by a greater-than-expected fall in new weekly jobless claims in the United States, in a hopeful sign that the economic recovery is gaining momentum.

Initial claims for state unemployment benefits dropped 14,000 to a seasonally adjusted 418,000, compared with forecasts for a drop to 420,0000 according to a Reuters poll.

“It’s generally a confirmation that the weakness we saw in the May data was more in the way of a bump in the road rather than falling off into some abyss,” said David Resler, chief economist at Nomura Securities International in New York.

“The soft patch will prove to be a temporary one, but that doesn’t mean we’ll be roaring ahead with growth.”

The market will now focus on Friday’s key U.S. jobs data for evidence of growth steadying in the world’s largest oil consumer. U.S. nonfarm payrolls likely rose modestly in June after suffering a setback the prior month.

Oil prices also found support after a report showed that U.S. private employers added far more jobs than expected in June. On Wednesday, a larger-than-expected drop in U.S. crude stocks and growing investor appetite following bullish oil forecasts from major banks also propped prices.

U.S. crude oil stocks fell by a more-than-expected 3.2 million barrels, according to the American Petroleum Institute ahead of a second stocks report due Thursday, tightening inventories in the top global oil consumer.

Top investment banks Goldman Sachs, Morgan Stanley and Barclays Capital have all published upbeat forecasts on the outlook for oil fundamentals this week, with some warning of shrinking spare capacity.

“In our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply,” said Goldman Sachs analysts in a note released on Thursday.

On Tuesday, Barclays Capital raised its 2012 forecast for Brent by $10 to $115 per barrel, and upgraded its 2012 forecast for U.S. crude by $4 to $110.

“I think there’s generally positive market sentiment and better risk appetite. There’s also a sense that the rate hike in China may be the last,” said Carsten Fritsch, an analyst at Commerzbank said.

China raised interest rates for the third time this year on Wednesday in a move that many investors saw as marking the end of its monetary tightening campaign, buoying the outlook for commodity demand.

Technicals are also helping to support the front-month Brent crude contract after it rose above the 50-day moving average in Thursday’s session, analysts said.

In the short term, Brent crude should consolidate between $112.40 to $114.48 for one more trading session before rising towards $120, while U.S. crude could hit $99.68, according to Reuters technical analyst Wang Tao.

European Outlook

The stronger prices came despite an expected increase in European Central Bank (ECB) interest rates in a move to show no let-up in its insistence to tackle inflation despite the euro zone’s intensifying debt crisis.

While analysts said higher rates could hurt future regional oil demand, they said the hike had already been factored into current price levels and that this would not dent future demand growth set to come mostly from Asia.

The European debt crisis is set to remain on investors’ radars after ratings agency Moody’s this week slashed Portugal’s credit rating to “junk” status and cast doubts on efforts to rescue distressed euro zone states without debt restructuring.

Concerns over a potential U.S. government debt default also raised fears of weaker demand. Inability to meet payment commitments could lead to higher borrowing costs and tip the economy back into recession. U.S. Treasury officials are discussing options to stave off a default, sources said.